Friday, October 25, 2013

Economy: What We Can Learn From U.K

(Drivebycuriosity) - U.K is back. The British Economy is growing again (businessweek): U.K. retail sales in September rose a higher-than-forecast 2.2% from a year earlier, jobless claims in September fell the most in 16 years, as unemployment held at 7.7% and British factories reported strengthening domestic and export demand in the third quarter.

This morning we learned that the British economy grew 0.8% in the third quarter compared with the previous quarter (bloomberg). Growth could be heading for 5% year-over-year, according to Rob Wood, chief U.K. economist at Berenberg Bank" (/marginalrevolution).

What can we learn from the comeback of the British economy?

A. Every crisis has an end - and often sooner than the pessimists believe.

B. Austerity works. The growth spurt (Financial Times marginalrevolution ) shows that the British economy is now beginning to harvest the fruits of the massive public spending cuts. "With aggressive cuts in welfare programs and other spending, Britain has pared its budget deficit to 7.4% of GDP this year from 11% in 2010", writes BloomergBusinessweek.

Yes, Austerity is painful and very unpopular. But the spending cuts led to less government influence and less bureaucracy. Public organizations are less efficient than private companies and tend to waste money, hampering private initiative and economic growth.

The British economy is now leaner and more efficient than before. Private enterprise gained more scope which animates more private investments. Money is used more efficiently leading to higher returns which is mirrored in the rekindled economic growth.

But some commentators are trying to turn these positive news into negative. BloombergBusinessweek laments "that growth in Britain had badly lagged the U.S., where enactment of a $787 billion budget stimulus package in 2009 sent budget deficits soaring" (businessweek).

I reckon that this comparison is unfair and wrong:

1. The US is getting massive tailwinds from the shale-gas boom there. The rising American oil production creates a lot of jobs and incomes and is flushing a lot of tax money into the government`s cash boxes.

2. The US economy is benefitting from Silicon Valley and other parts of the US technology sector like Apple, Google and Amazon.com.

3. The U.K economy is somewhat handicapped by the traditional close connections to the weak European neighbors (Italy, Spain, France).